The CPI is supposed to be a measure of price increases over time for Americans, so it should reflect the actual inflation rate, right? Why do we get cognitive dissonance when we hear reported numbers like 1% annual inflation? Is it possible that the number is incorrect? Let's take a good look.
We have all seen inflation over the past few years. Perhaps the truest nature of rising prices is best seen at the grocery store. Milk, eggs, bread, meats, it doesn’t matter. Prices are higher, and containers are smaller. I feel lucky that a dozen eggs still contains twelve eggs! What next, a container of ten for the same price (you heard it here first)? The price of feeding a family is rising, and rising quickly.
But it doesn’t stop there. Pay your health insurance premium, and check the increase in your deductible and out-of-pocket expenses. Pay your homeowner’s insurance premium; what was it two yeas ago? Buy pet food, pay tuition bills, go to a movie, pay for your cable TV and Internet service, and pretty much everything except gasoline -- it has all gone up. Much of it by a LOT! And now gasoline is rising – quickly. Yet wages and salaries have not kept pace, and Social Security recipients have been denied any increase three times since 2010. What’s up with that?
Why does the government obfuscate the truth with their statistics? Simple; they would have faster-ballooning budget deficits if they told the truth. Federal salaries, benefits, Social Security, indexed pensions, labor contracts, you name it – all depend on the cost-of living adjustments (COLAs) they are required to pay. Theses COLAs are pegged to the CPI as reported by the government. Now do you see why the Labor Department is in charge of the CPI – talk about a conflict of interest!
Since increased costs would necessitate increased government borrowing (the Government has no money), that means our dependence on foreign governments to buy our bonds would increase. It would truly create an upward debt spiral that would be uncontrollable. The interest payments would consume all other programs, and that is already happening quickly enough! We can’t have that; it would expose the ineptness of the U.S. Government.
Using the Case-Shiller Index to measure changes in shelter costs, and allocating its weight in a more reasonable manner, would produce a more accurate CPI. But that is clearly NOT the intention of the BLS in reporting the so-called rate of inflation.
So, a very smart financial expert named Ed Butowsky developed his own method of price change measurement. Dubbed the Chapwood Index, after his investment firm, this index measures prices of things we all buy, city by city, over time.
Jacksonville is one of the 50 cities used to track the Chapwood index, which a Google search will easily bring up for the interested. The results are startling, but easy to believe, as they mirror what we all see day-to-day. For the past year, the Chapwood Index for Jacksonville was up 7.6%, and for 5 years it averages 8.2%. That’s a far cry from 1%, as reported by the government.
By comparison, higher cost cities have increased even more. For example, San Francisco was up 12.7% last year, San Diego +13%, and NYC +10.3%. If you believe these numbers, as I do, you can probably imagine the damage that is being inflicted on the Middle Class in America, from rising prices and stagnant wages. It is just plain wrong.
What does this mean for investors? Next week, in Part 3 of this series, we will discuss investments that make sense in this environment.
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